Carbon accounting, management quality, and bank performance in East Africa

Abstract

Does it pay to report green activities? This question has dominated academic discussion and has further spiraled into the industry. Questions exist about the value relevance of carbon accounting, given that such practice is voluntary and consumes resources. The question becomes more legitimate when banks whose activities do not negatively affect the environment adopt carbon accounting. Given this perplexing phenomenon, the study examined the impact of carbon accounting on the performance of banks in East Africa. Moreover, the effect of management quality on such a relationship was analyzed. The study relied on eight years of integrated, sustainability, and annual reports of 79 banks in East Africa, collecting the carbon accounting data. A multiple regression estimation technique was employed to estimate the models. The study demonstrated that carbon reporting had a negative and insignificant relationship with the financial performance of banks. In addition, the study showed that management quality turned the relationship between carbon disclosure and firm performance positive, suggesting that the banks with high quality of management benefited financially from carbon reporting. The study concludes that carbon accounting does not benefit East African banks. However, banks that had high quality of management financially benefited from carbon accounting. The significant implication of these results is that banks can benefit from adopting carbon accounting but only when they have high management quality. This study contributes to the debate on the conflicting empirical findings on the value relevance of carbon accounting in Africa, which is scarce.